Has the commodity price ride ended: Is it time to get off?

When it comes to commodity prices, the “drought” bloom is off the rose, and values are fading with reduced demand and the prospect of increased competition from South America in the near future. However, corn and soybeans remain at record level prices with the psychological help of razor-thin carryout. But the volatility in commodity prices has not been the only area where economic values have whip-sawed agriculture.

While corn and soybean prices took farmers on some wicked roller coaster rides in the past year, there have been some other markets that have had lesser volatility, but which should be noted because of their integrated impact on farm profitability. Iowa State University economist Chad Hart says, “Compared to oil price and the Dow Jones Index, corn and soybean prices are much more variable.” He says the Dow had a 12% swing over the course of the year, with a 2% drop in June and a 10% climb before a 6% retreat. Oil prices began the year 7% higher, but with increased domestic supplies and reduced demand for gasoline, prices weakened with a 31% trading range and a 10% drop from the start of 2012 to the end of the year.

Buckle your seat belt. Corn prices had a 42% swing with a 6% gain by the end of the year. Soybean had a 50% swing in prices and a 16% gain by year’s end. Beans have returned their summertime drought premium, but corn still have some. Hart says the price weakness in the past several months has been due to loss of demand. He says, “Domestic soybean demand is down and export demand is up. Much of the pullback is centered on the livestock industry as it deals with feed pricing and availability issues and the relative weakness in domestic meat demand. And similar tales can be told for the other demand sectors. For example, corn demand via ethanol took a hit this summer as corn prices rose and ethanol plant margins fell.”

Regarding ethanol, Hart says ethanol prices tried to climb in the summer but reduced demand for gasoline did not allow ethanol to keep up the torrid pace for corn. Ethanol retained its cost advantage over gasoline and supported margins for blenders. Those profits did not get returned to the refiners and ethanol production declined 10% as corn prices rose.

Hart rhetorically asks about the resiliency of demand for commodity prices, “With the shorter crops, prices rose and demands withdrew. As we move into 2013, will those demand sectors rebound quickly enough if we are able to produce a normal crop? Current demand projections show livestock and biofuel demand continuing to decline. Over the last five years, the corn and soybean markets have been strongly supported by robust demand from the food, feed, fuel, and fiber sectors. But that run may be coming to an end.”

He says corn and soybean prices are poised to either climb or fall or any bit of speculative news, of which there is no shortage. And he says the news is not quite as bullish for prices, “Just before the 2012 harvest, the futures markets pointed to 2013/14 corn prices in the $6.25 per bushel range. 2013/14 soybeans were pricing over $13 per bushel. Those prices have declined, based on the questions about demand. But we ended the year with futures indicating 2013/14 corn prices around $5.65 per bushel and soybean prices around $12.40 per bushel.”

Hart asks if those prices are above your cost of production, and if so, you should have a profitable 2013. However, there are some management requirements. Those include close budgeting for input costs and locking in profits while still possible. He says, “Margins are tightening both prices fall and input costs increase. Farming is still a competitive industry. The profits over the last five years have induced more acreage into production and created more demand for cropland and crop inputs. Eventually, the crop sector will work its way back to breakeven profitability or losses. But thus far, 2013 does not look to be that year.”

Summary:

While the economy has had considerable volatility, corn and soybean prices have been some of the more volatile. Both have lost nearly their entire drought premium, but ended 2012 higher than they began. Current prices for 2013 are considerably lower, but still remain in the level of farm profitability. Nevertheless, farmers should conduct some strategic budgeting and lock in profits while they exist. A large crop in South America, followed by a large US crop could erode prices substantially.